The international body of capital market regulators, of which the Securities and Exchange Board of India (Sebi) too is an active member, has issued draft recommendations to bring more transparency in asset backed securities (ABS) and derivative swaps (CDS) products.
"Regulators around the world should consider forcing banks to take an economic interest in asset-backed securities deals and promote central clearing for credit default swap trades", said Task force on Unregulated Financial Markets and Products (TFUMP) of the International Organization of Securities Commissions (IOSCO).
The draft recommendations are the first from TFUMP since its was set up in November 2008 nearly a month after the collapse of US investment banking giant Lehman Brothers. Setting up of a task force by IOSCO was in response to concerns raised over the risk of unregulated products by G20 members. The failure of securities and debt market after the US housing fallout has been accessed as the chief reason for worsening of global economic conditions.
Realising that lack of adequate information regarding complex financial products has let to chaos, the TFUMP has suggested that supervisors should force banks, which act as originators of asset-backed securities deals to retain a long-term exposure to the deals they bring to market. It has also stressed the need to "enhance transparency by through disclosure by issuers of all checks, assessments and duties that have been performed or risk practices that have been undertaken by the underwriter, sponsor, and or originator."
In fact, the task force has also tried to address the issue by recommending the eliminate of incentive to overstate the quality of products rated by credit rating agencies. After the collapse of top US banks questions were raised over the credibility of products rated by some of the top credit rating agency.
The IOSCO task force has said that it believes the establishment of central clearing houses for CDS trades is an important way of reducing counter party risk and boosting transparency in this market.
In the domestic market too, the Reserve Bank of India (RBI) and Sebi has been mooting to bring stringent disclosure norms for companies and banks in relation to securities CDS products. The task force also said regulators must develop a framework to allow information on CDS trading and clearing to be shared among them so they can then cooperate in the way they act upon it.
The response to these proposed recommendations from regulators are expected from the market users June 15, 2009 after which final recommendations will be issued
